Football as Economics

Columbian international, James Rodriguez was sold to AS Monaco in 2013 for 45 million Euros, but after his sparkling performance at the 2014 World Cup, just one year later, he is valued over 80 million Euros. Why? One of the foundational principles of economics is “demand” (“the desire for a particular good or service supported by the possession of the necessary means of exchange to effect ownership”) and “supply” (“the quantity of a good or service available for sale at any specified price”). In this case the good or service is the footballer; the demand is from the richest global football clubs including Real Madrid and Manchester United; and the supplier is AS Monaco, the player’s owner. Once the “price” (“what must be given in exchange for something expressed usually in terms of a quantity of money per unit of a commodity”) Real Madrid is willing to pay reaches a level acceptable to the supplier, a sale is feasible. Why is Real Madrid willing to pay such a high price for Rodrguez? That would have something to do with “value”-the worth of something to its owner comprised of either “value in use” (“the pleasure a commodity actually generates for its owner-excellent performances on the football pitch and commercial endorsements and other value-added transactions) or “value in exchange” (“the quantity of other commodities, usually money a commodity can be swapped for”- now said to be approximately 88million Euros, and may be expected to rise further if he continues his excellent form). In effect Rodriguez is similar to a security listed on a stock exchange (“a market in which securities are bought and sold” and even though unlike shares he can’t be physically divided into smaller units (!) (some footballers are indeed fractionally owned by multiple owners-recall the controversy over the ownership of Carlos Tevez and Javier Mascherano years back!), Rodriguez’ current sale and the previous transfer from Porto were “secondary market” transactions (“a market in which assets are resold and purchased, as distinct from a primary market in which assets are sold for the first time”). The primary market would typically be when a young player is sold for the first time, usually by his parents or a football academy! So players are “assets” (a business accounting term, representing items on the “balance sheet” of a company, owned by the company and with a monetary value”); while footballers are “current assets” which the business can readily convert to cash by selling or loaning them out, clubs also have “fixed assets”-stadia, land, buildings etc. as well as “intangible assets” including goodwill and patents. The clubs finance fixed, current and other assets through “liabilities” (“sums of money for which account has to be made such as bank loans, overdrafts and short term debts”) and “equity” (“the residual value of a company’s assets after all outside liabilities (other than to shareholders) have been allowed for”). The balance sheet is thus “a statement of the wealth of a business, other organization or individual on a given date”, containing a listing and value of its assets, liabilities and owners’ equity. Whenever teams have invested huge resources on fixed assets, their ability to buy expensive players may be constrained (example Arsenal) until liabilities are reduced, except if like Chelsea, PSG or Manchester City, owners can pump in fresh equity or related party loans to finance acquisitions. Arsene Wenger, being a good economist has simply acted rationally in his conservative procurement strategy over the last few years! And that brings us to “scarcity” and “choice”-the needs and wants of individuals, groups, firms (and football clubs!!!) exceed the resources available to satisfy them hence choices have to be made. The price mechanism (or socialism or other central distribution system, in football say in an amateur football league) helps to determine the distribution of scarce resources. It is because of scarcity, choice and the price mechanism that James Rodriguez is not going to Newcastle United or Athletic Bilbao, but to Real Madrid, the most prestigious global football club, with resources to purchase him at the post-World Cup valuation! Even if Newcastle could in theory muster resources to pay for Rodriguez, and he was willing to forgo the prestige of joining Madrid, a smaller team will have to consider the “opportunity cost” (“the value of that which must be given up to acquire or achieve something”) of expending all their resources on one “asset” with the “risk” (“a state in which the number of possible future events exceeds the number of events that will actually occur, and some measure of probability can be attached to them” as opposed to “uncertainty” in which the probabilities are unknown) of “impairment” through injury, cultural maladjustments, poor relations with team mates or coach or death!) when a “cost-benefit analysis” may suggest better value in buying six or seven very good players with such funds. The football “market” (“a market is created whenever potential sellers of a good or service are brought into contact with potential buyers and a means of exchange is available”) is affected by “globalization” (“geographical shifts in domestic economic activity around the world and away from nation states” or “the geographic dispersion of industrial and service activities and the cross-border networking of companies”) so players are sold across national borders with sports thus becoming an increasingly important component of “international trade” (“the exchange of goods and services between one country and another, which arises because of differences in relative costs of production between countries, and because it increases the economic welfare of each country by widening the range of goods and services available for consumption”)-the English Premier League for instance buys highly-skilled players from West Africa, South America and Continental Europe enriching everyone in the process! Like other economic activities, football leverages the four “factors of production”-land, labour, capital and entrepreneurship and where those factors are distorted (such as through age cheating, corruption, inadequate training and facilities, ineffective regulation or undue government control), the market may not attain its full potential! The market is highly developed and competitive though some may argue that the Spanish Liga resembles de facto “duopoly” (“two sellers only of a good or service in a market”) of Real Madrid and Barcelona until Atletico Madrid broke in this year; the English Premiership is an “oligopoly” (“a market which is dominated by a few large suppliers”) of Manchester United, Chelsea, Manchester City, Arsenal and Liverpool, while the German Bundesliga looks like a Bayern Munich “monopoly” (“a market in which there is only one supplier”), but that characterization may not be wholly accurate since all clubs actively sell or buy players even though the dominant teams tend to buy the most expensive items! *Note*All definitions are from The Economist’s Dictionary of Economics.